COMPENSATION MANAGEMENT

Human Resource is the most vital resource for any organization. It is responsible for
each and every decision taken, each and every work done and each and every result.
Employees should be managed properly and motivated by providing best remuneration
and compensation as per the industry standards. The lucrative compensation will also
serve the need for attracting and retaining the best employees.

Compensation is the remuneration received by an employee in return for his/her

contribution to the organization. It is an organized practice that involves balancing the
work-employee relation by providing monetary and non-monetary benefits to employees.
Compensation is an integral part of human resource management which helps in
motivating the employees and improving organizational effectiveness.

Components of Compensation System

Compensation systems are designed keeping in minds the strategic goals and business
objectives. Compensation system is designed on the basis of certain factors after
analyzing the job work and responsibilities. Components of a compensation system are as
follows:
1. JOB ANALYSIS
Job analysis is a systematic approach to defining the job role, description,
requirements, responsibilities, evaluation, etc. It helps in finding out required level of
education, skills, knowledge, training, etc for the job position. It also depicts the job
worth i.e. measurable effectiveness of the job and contribution of job to the organization.
Thus, it effectively contributes to setting up the compensation package for the job
position.

Importance of Job Analysis

Job analysis helps in analyzing the resources and establishing the strategies to accomplish
the business goals and strategic objectives. It forms the basis for demand-supply analysis,
recruitments, compensation management, and training need assessment and performance
appraisal.

Components of Job Analysis:

Job analysis is a systematic procedure to analyze the requirements for the job role and job
profile. Job analysis can be further categorized into following sub components.

Job Position
Job position refers to the designation of the job and employee in the organization. Job
position forms an important part of the compensation strategy as it determines the level of
the job in the organization. For example management level employees receive greater pay
scale than non-managerial employees. The non-monetary benefits offered to two different
levels in the organization also vary.

Job Description

Job description refers the requirements an organization looks for a particular job position.
It states the key skill requirements, the level of experience needed, level of education
required, etc. It also describes the roles and responsibilities attached with the job position.
The roles and responsibilities are key determinant factor in estimating the level of
experience, education, skill, etc required for the job. It also helps in benchmarking the
performance standards.

Job Worth

Job Worth refers to estimating the job worthiness i.e. how much the job contributes to the
organization. It is also known as job evaluation. Job description is used to analyze the job
worthiness. It is also known as job evaluation. Roles and responsibilities helps in
determining the outcome from the job profile. Once it is determined that how much the
job is worth, it becomes easy to define the compensation strategy for the position.

Therefore, job analysis forms an integral part in the formulation of compensation strategy
of an organization. Organizations should conduct the job analysis in a systematic at
regular intervals. Job analysis can be used for setting up the compensation packages, for
reviewing employees’ performance with the standard level of performance, determining
the training needs for employees who are lacking certain skills.
2. PAY STRUCTURE:
Once job analysis has been done organizations need to decide upon the pay structures.
Pay structure refers to the process of setting up the pay for a job in an organization. The
process deals with internal and external analysis to estimate the compensation package
for a job profile. Internal equity, External equity and Individual equity are the most
popular pay structures. Job description provides the in depth knowledge about the job
profile and its worth.

Pay structures are the strong determinant of employee’s value in the organization. It helps
in analyzing the employee’s role and status in the organization. It provides for fair
treatment to all employees. Pay structures also include the estimation of incentives.
Internal Equity

The internal equity method undertakes the job position in the organizational hierarchy.
The process aims at balancing the compensation provided to a job profile in comparison
to the compensation provided to its senior and junior level in the hierarchy. The fairness
is ensured using job ranking, job classification, level of management, level of status and
factor comparison.

External Equity

Here the market pricing analysis is done. Organizations formulate their compensation
strategies by assessing the competitors’ or industry standards. Organizations set the
compensation packages of their employees aligned with the prevailing compensation
packages in the market. This entails for fair treatment to the employees. At times
organizations offer higher compensation packages to attract and retain the best talent in
their organizations.

3. SALARY SURVEYS:
Organizations have to bridge the gap between the industry standards and their salary
packages. They cannot provide compensation packages that are either less than the
industry standards or are very higher then the market rates. For the purpose they
undertake the salary survey. The Salary survey is the research done to analyze the
industry standards to set up the compensation strategy for the organization. Organizations
can either conduct the survey themselves or they can purchase the survey reports from a
reputed research organization. These reports constitute the last 2-5 years or more
compensation figures for the various positions held by the organizations. The analysis is
done on the basis of certain factors defined in the objectives of the research.

Types of Compensation

Compensation provided to employees can direct in the form of monetary benefits and/or
indirect in the form of non-monetary benefits known as perks, time off, etc.
Compensation does not include only salary but it is the sum total of all rewards and
allowances provided to the employees in return for their services. If the compensation
offered is effectively managed, it contributes to high organizational productivity.

Direct Compensation

Indirect Compensation
Need of Compensation Management

• A good compensation package is important to motivate the employees to increase

the organizational productivity.

• Unless compensation is provided no one will come and work for the organization.
Thus, compensation helps in running an organization effectively and
accomplishing its goals.
 • Salary is just a part of the compensation system, the employees have other
psychological and self-actualization needs to fulfill. Thus, compensation serves
the purpose.

The most competitive compensation will help the organization to attract and sustain the
best talent. The compensation package should be as per industry standards.

strategic Compensation

Strategic compensation is determining and providing the compensation packages to the

employees that are aligned with the business goals and objectives. In today’s competitive
scenario organizations have to take special measures regarding compensation of the
employees so that the organizations retain the valuable employees. The compensation
systems have changed from traditional ones to strategic compensation systems.

Evolution Of Compensation
Today’s compensation systems have come from a long way. With the changing
organizational structures workers’ need and compensation systems have also been
changing. From the bureaucratic organizations to the participative organizations,
employees have started asking for their rights and appropriate compensations. The higher
education standards and higher skills required for the jobs have made the organizations
provide competitive compensations to their employees.

Compensation strategy is derived from the business strategy. The business goals and
objectives are aligned with the HR strategies. Then the compensation committee or the
concerned authority formulates the
compensation strategy. It depends on both internal and external factors as well as the life
cycle of an organization.

Traditional Compensation Systems

In the traditional organizational structures, employees were expected to work hard and
obey the bosses’ orders. In return they were provided with job security, salary increments
and promotions annually. The salary was determined on the basis of the job work and the
years of experience the employee is holding. Some of the organizations provided for
retirement benefits such as, pension plans, for the employees. It was assumed that
humans work for money, there was no space for other psychological and social needs of
workers.

Change in Compensation Systems

With the behavioral science theories and evolution of labour and trade unions, employees
started asking for their rights. Maslow brought in the need hierarchy for the rights of the
employees. He stated that employees do not work only for money but there are other
needs too which they want to satisfy from there job, i.e. social needs, psychological
needs, safety needs, self-actualization, etc. Now the employees were being treated as
human resource.

Their performance was being measured and appraised based on the organizational and
individual performance. Competition among employees existed. Employees were
expected to work hard to have the job security. The compensation system was designed
on the basis of job work and related proficiency of the employee.

Today’s Modern Compensation Systems

Today the compensation systems are designed aligned to the business goals and
strategies. The employees are expected to work and take their own decisions. Authority is
being delegated. Employees feel secured and valued in the organization. Organizations
offer monetary and non-monetary benefits to attract and retain the best talents in the
competitive environment. Some of the benefits are special allowances like mobile,
company’s vehicle; House rent allowances; statutory leaves, etc.
IMPORTANCE OF COMPENSATION
Compensation and Reward system plays vital role in a business organization. Since,
among four Ms, i.e. Men, Material, Machine and Money, Men has been most important
factor, it is impossible to imagine a business process without Men. Every factor
contributes to the process of production/business. It expects return from the business
process such as rent is the return expected by the landlord, capitalist expects interest and
organizer i.e. entrepreneur expects profits. Similarly the labour expects wages from the
process.

Labour plays vital role in bringing about the process of production/business in motion.
The other factors being human, has expectations, emotions, ambitions and egos
Labour therefore expects to have fair share in the business/production process. Therefore
a fair compensation system is a must for every business organization. The fair
compensation system will help in the following:

• An ideal compensation system will have positive impact on the efficiency and
results produced by employees. It will encourage the employees to perform better
and achieve the standards fixed.

• It will enhance the process of job evaluation. It will also help in setting up an
ideal job evaluation and the set standards would be more realistic and achievable.

• Such a system should be well defined and uniform. It will be apply to all the
 levels of the organization as a general system.

• The system should be simple and flexible so that every employee would be able to
compute his own compensation receivable.

• It should be easy to implement, should not result in exploitation of workers.

• It will raise the morale, efficiency and cooperation among the workers. It, being
just and fair would provide satisfaction to the workers.

• Such system would help management in complying with the various labor acts.

• Such system should also solve disputes between the employee union and
management.

• The system should follow the management principle of equal pay.

• It should motivate and encouragement those who perform better and should
provide opportunities for those who wish to excel.

• Sound Compensation/Reward System brings peace in the relationship of

employer and employees.

• It aims at creating a healthy competition among them and encourages employees

to work hard and efficiently.

• The system provides growth and advancement opportunities to the deserving

employees.

• The perfect compensation system provides platform for happy and satisfied
workforce. This minimizes the labour turnover. The organization enjoys the
stability.

• The organization is able to retain the best talent by providing them adequate
compensation thereby stopping them from switching over to another job.

• The business organization can think of expansion and growth if it has the support
of skillful, talented and happy workforce.

• The sound compensation system is hallmark of organization’s success and

prosperity. The success and stability of organization is measured with pay-
package it provides to its employees.

TYPES OF COMPENSATION
1.DIRECT COMPENSATION: Direct compensation refers to monetary benefits
offered and provided to employees in return of the services they provide to the
organization. The monetary benefits include basic salary, house rent allowance,
 conveyance, leave travel allowance, medical reimbursements, special allowances,
bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite time.

Basic Salary

Salary is the amount received by the employee in lieu of the work done by him/her
for a certain period say a day, a week, a month, etc. It is the money an employee
receives from his/her employer by rendering his/her services.
House Rent Allowance

Organizations either provide accommodations to its employees who are from different
state or country or they provide house rent allowances to its employees. This is done to
provide them social security and motivate them to work.

Conveyance

Organizations provide for cab facilities to their employees. Few organizations also
provide vehicles and petrol allowances to their employees to motivate them.

Leave Travel Allowance

These allowances are provided to retain the best talent in the organization. The
employees are given allowances to visit any place they wish with their families. The
allowances are scaled as per the position of employee in the organization.

Medical Reimbursement

Organizations also look after the health conditions of their employees. The employees are
provided with medi-claims for them and their family members. These medi-claims
include health-insurances and treatment bills reimbursements.

Bonus

Bonus is paid to the employees during festive seasons to motivate them and provide them
the social security. The bonus amount usually amounts to one month’s salary of the
employee.

Special Allowance

Special allowance such as overtime, mobile allowances, meals, commissions, travel

expenses, reduced interest loans; insurance, club memberships, etc are provided to
employees to provide them social security and motivate them which improve the
organizational productivity.
2.INDIRECT COMPENSATION : Indirect compensation refers to non-monetary
benefits offered and provided to employees in lieu of the services provided by them to the
organization. They include Leave Policy, Overtime Policy, Car policy, Hospitalization,
Insurance, Leave travel Assistance Limits, Retirement Benefits, Holiday Homes.

Leave Policy

It is the right of employee to get adequate number of leave while working with the
organization. The organizations provide for paid leaves such as, casual leaves, medical
leaves (sick leave), and maternity leaves, statutory pay, etc.

Overtime Policy

Employees should be provided with the adequate allowances and facilities during their
overtime, if they happened to do so, such as transport facilities, overtime pay, etc.

Hospitalization

The employees should be provided allowances to get their regular check-ups, say at an
interval of one year. Even their dependents should be eligible for the medi-claims that
provide
Insurance

Organizations also provide for accidental insurance and life insurance for employees.
This gives them the emotional security and they feel themselves valued in the
organization.

Leave Travel

The employees are provided with leaves and travel allowances to go for holiday with
their families. Some organizations arrange for a tour for the employees of the
organization. This is usually done to make the employees stress free.

Retirement Benefits

Organizations provide for pension plans and other benefits for their employees which
benefits them after they retire from the organization at the prescribed age.

Holiday Homes

Organizations provide for holiday homes and guest house for their employees at different
locations. These holiday homes are usually located in hill station and other most wanted
holiday spots. The organizations make sure that the employees do not face any kind of
difficulties during their stay in the guest house.

Flexible Timings

Organizations provide for flexible timings to the employees who cannot come to work
during normal shifts due to their personal problems and valid reasons.